Coverage for Former Employees | Health Insurance

A federal workplace law, the Consolidated Omnibus Budget Reconciliation Act, or COBRA (29 U.S.C. § 1162), requires your employer to offer you—and your spouse and dependents—continuing insurance coverage in either of the following situations:

You lose insurance coverage because your number of work hours is reduced.

You lose your job for any reason other than gross misconduct. Because the law is still relatively new and was a drastic change from Business as Usual, the courts are still grappling with the question of how egregious the workplace behavior must be to qualify as gross misconduct. So far, courts have ruled that inefficiency, poor performance, negligence, or errors in judgment on the job are not enough. There must be some deliberate, wrongful violations of workplace standards to qualify as gross misconduct.

COBRA was intended to extend access to group health insurance coverage to people who would otherwise be totally unprotected—and unlikely to be able to secure coverage on their own. The law applies to all employers with 20 or more employees. Under the law, employers need only make the insurance available; they need not pay for it. Employers may charge up to 102% of the base premium for continued coverage—the extra 2% thrown in to cover administrative costs.

Those covered under COBRA include:

all individuals who are or were provided insurance coverage under an employer’s group plan, and

those individuals’ beneficiaries—who typically include a spouse and dependent children.

1. Continuing Coverage
Qualified employees and former employees may elect to continue coverage up to 18 months after they quit or are fired or get laid off, or after a reduction in hours that makes them ineligible for coverage. Those who become disabled, however, can get COBRA coverage for 29 months—until Medicare payments typically kick in.

No one can choose to enroll in an insurance plan upon becoming ineligible for workplace coverage. COBRA extends only to those already enrolled when their health insurance coverage ceases.

In addition, COBRA provides that covered individuals must be given the right to convert to an individual policy at the end of the continuation period—although that coverage is usually significantly more expensive.

2. Coverage for Dependents
Beneficiaries or dependents may also elect to continue coverage for 18 months.

However, they may opt to have coverage continued for up to 36 months if any of the following occur:

The covered employee dies.

They are divorced or legally separated from the covered employee.

A minor dependent child turns 18 or otherwise ceases to be considered a dependent under the plan.

They become disabled and eligible for Social Security disability insurance benefits.

3. Preexisting Conditions
COBRA addresses the most common health insurance bugaboo: denial of coverage for preexisting conditions.

Under COBRA, coverage must be offered regardless of any preexisting medical conditions. And, if an employee obtains new employment with coverage that contains exclusions or limitations for any such conditions, the former employer may not terminate coverage before the end of the COBRA coverage period. However, the employer may end coverage if a beneficiary such as a spouse is covered by another group health plan—as long as there is no significant gap in benefits

4. Enforcing COBRA
COBRA provides for a number of fines for employers and health insurance plan administrators who violate its requirements. However, the Act has so many complexities that no one can agree on exactly what circumstances release an employer from its requirements. And, frustratingly, there is no one place you can call to get help if you think your rights under COBRA have been violated. Parts of the law are administered by the U.S. Labor Department and other parts fall under the Internal Revenue Service—and the two agencies frequently refer COBRA complaints back and forth to each other.

If you have a COBRA-related question or complaint, you can try calling your local office of either of those agencies, but neither has a track record of actively enforcing COBRA requirements. Your employer is required to provide you with an explanation of your COBRA rights when you are enrolled in a group health care plan covering 20 or more employees. However, these materials are seldom well written or easy to understand.

In general, COBRA can be enforced only through an expensive lawsuit. That means that it typically can be used only by large groups of former employees who have been denied their rights to continue group health insurance coverage—and who can share the expense of hiring a lawyer and filing a lawsuit to enforce that right.

Coverage for Current Employees | Health Insurance

No law mandates insurance coverage in every workplace. But employees can take some insurance aid and comfort from a number of state laws—and from a federal law imposing some fundamental fairness in coverage.

Caution Independent contractors need not apply. If you work as an independent contractor—a term used to describe people who are in business for themselves, such as consultants, freelancers, the self-employed, entrepreneurs, and business owners—you are covered by neither federal nor state laws that require health insurance coverage or continuation. To become insured, you must proceed on your own through the often mind-numbing process of procuring insurance—and the often bank account-draining process of paying for it. If you have questions about your work status as an independent contractor or employee, consult your local department of labor.

1. State Laws

A few states, counties, and cities now require some employers to provide health insurance coverage for some employees who work there. For example, Hawaii requires employers to provide coverage to employees earning a set amount or more per month. (Haw. Rev. Stat. § 393-11.)

In addition, some state laws require that employers who offer insurance to employees must provide certain minimum coverage. The state requirements vary considerably, but typical minimums include coverage for medical and surgical benefits, treatment of mental illness, alcoholism, and drug abuse and preventative testing such as mammograms and PAP smears. Check with your state’s health commissioner to find out whether there is any minimum mandated coverage in your area.

Some states impose additional restrictions on workplace health insurance. For example, a growing number of them make it illegal for employers to fire employees because they file a legitimate claim against their company’s health insurance.

2. The Health Insurance Portability Act

The Health Insurance Portability and Accountability Act, or HIPAA (Pub. Law 104-191), a federal law that took effect in July of 1997, makes it easier for employees to change jobs without losing insurance coverage—and to get coverage in the first place.

The law’s biggest promise is to improve the portability of health insurance coverage. But in addition, it purports to:

take aim against health care discrimination, fraud, and abuse, and

promote the use of tax-favored insurance plans.

a. Increased Portability
Group insurers now face limits when attempting to restrict enrollment because of preexisting medical conditions.

Under HIPAA, for example, pregnancy is not considered a preexisting condition—and newborns or newly adopted children cannot be excluded if they are enrolled within 30 days of birth or adoption.

The maximum amount of time a group health insurance plan, HMO, or self-insured plan may exclude someone on the basis of a preexisting condition is 12 months. This exclusion period is reduced by the amount of time an employee previously had continuous coverage through other private insurance or public insurance programs.

Insurers must offer individual coverage to a person who loses group coverage if the individual:

was continuously covered for 18 months under a group health plan

has exhausted COBRA coverage (see Section C, below), or

is ineligible for coverage through government programs such as Medicare or Medicaid.

b. Discrimination Protection
Group health plans and employers cannot deny coverage for an individual and his or her dependents based on health status, physical or mental medical condition, claims experience, genetic information, disability, or domestic violence.

The Inspector General and U.S. Attorney General are charged with establishing a program to coordinate federal, state, and local programs to control health plan fraud and abuse—and criminal penalties can now be imposed for defrauding any health benefits program.

c. Tax-favored Insurance Plans
Beefed up by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which became effective January 1, 2004, there are now a number of programs available with the aim of giving employees tax advantages to offset health care costs.

Health Savings Accounts. A Health Savings Account permits some workers to save for, and pay, health care expenses for themselves, a spouse, and dependents, free of taxes.

HSAs may be established by any individual who is covered by a qualified high-deductible health plan—those with an annual deductible of at least $1,000 for individuals or $2,000 for families. Contributions can be made into these accounts—by either individual employees or their employers—for the full amount of the annual deductible each year, to a maximum of $2,600 for individuals and $5,150 for families. They operate much the same way as the now-familiar Individal Retirements Accounts (IRAs) do for saving retirement money.

Medical Savings Accounts (MSAs) were the precursor to HSAs—and money put in them can be rolled over into an HSA.

Possible benefits of HSAs include:

You can claim a tax deduction for contributions you make, even if you do not itemize your deductions on Form 1040.

Interest or other earnings on the assets are tax-free.

Distributions may be tax-free if you pay qualified medical expenses.

Contributions remain in from year to year until you use them.

They are portable; they stay with you if you change employers or leave the work force.

Flexible Spending Arrangements. A Flexible Spending Arrangement (FSA), offered at an employer’s discretion, allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution—and you are also free to contribute.

Possible benefits of an FSA include:

Your employer’s contributions can be excluded from your gross income.

No employment or federal income taxes are deducted from the contributions.

Withdrawals may be tax-free if you pay qualified medical expenses.

You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.

Health Reimbursement Arrangements. A Health Reimbursement Arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through your own voluntary salary reduction agreement. Employees are reimbursed tax-free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans.

Possible benefits of an HRA:

You can exclude your employer’s contributions from your gross income.

Reimbursements may be tax-free if you pay qualified medical expenses.

Any unused amounts in the HRA can be carried forward for reimbursements in later years.

Note For more information on all of these tax-deferred accounts, see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, at www.irs.gov. Or order it from the IRS by calling 800-829-3676.

No Legal Right to Coverage | Health Insurance

While many workers feel insurance coverage is an entitlement, in reality, offering health insurance to employees is purely voluntary—a matter of tradition, not law. This truth flies in the face of many firmly held beliefs about workplace benefits. But, in fact, there is no federal law that requires employers to provide or pay for health insurance coverage for all current employees, or even full-time employees. In 2004, only 61% of all working employers received health insurance coverage from their employers.

No federal legal scheme requires every employer to offer insurance coverage. However, an employer who promises to provide health insurance—in an employee manual, for example—must follow through on the promise. And benefits must be provided without discriminating against any employee or group of employees. That includes employees who are statistically more likely to incur high medical costs. For example, federal laws specifically provide that women workers and older workers must be provided with the same coverage as other workers. (See Chapter 7, Sections C and E.) One grand exception to this general rule is that many state laws now allow employers to offer health plans that offer higher premiums to smokers. (See Chapter 6, Section E.)

In recent years, some companies have discontinued or cut back on insurance coverage they offer employees, simply because of the expense. The legal rule emerging is that of evenhandedness: Employers cannot offer insurance coverage to some employees and deny it to others.

But because health insurance is a job benefit that is not regulated by law, employers are otherwise free to fashion a plan of any stripe. They may:

require employees to contribute to the cost of premiums

offer reduced reimbursement or pro rata coverage to part-time employees

limit options to one insurance plan or offer a variety of choices, or

give employees a sum of money earmarked for insurance coverage that may be applied to any chosen plan.

As anyone who has read the fine print on a health insurance policy can attest, insurers, too, place conditions on the coverage they provide. The most nettling of these limitations is on preexisting conditions. Under these provisions, if you have had a recent illness or have a chronic medical condition, you may be denied coverage, be made to wait a specific time period until your condition will be covered, or be forced to pay high premiums for specialized coverage. The greatest headway on doing away with the preexisting condition denial of coverage has been made in the federal law requiring continuing coverage for former employees. (See Section C3, below.)

Traditionally, employers that have provided health care coverage have done so through an indemnity or reimbursement plan which pays the doctor or hospital directly or reimburses the employee for medical expenses he or she has already paid.

While traditional coverage allowing employees to seek out their preferred medical provider is still widely used, a growing number of employers today provide coverage through the alternatives of a health maintenance organization (HMO) or a preferred provider organization (PPO).

An HMO is made up of hospitals and doctors who provide specified medical services to employees for a fixed monthly fee. Within the HMO service area, covered employees must use the HMO hospitals and doctors unless it’s an emergency or they receive permission to go elsewhere.

A PPO is a network of hospitals and doctors who agree to provide medical care for specified fees. Often the network is put together by an insurance company that also administers it. Employees usually can choose between using the network’s hospitals and doctors or going elsewhere.

There are two main categories of employee health insurance: coverage for current employees and coverage for former employees.